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Navigator Algorithm – Buy Signal 2/4/22 / Cash Accounts – 50% SPY and 50% QQQ +5.25 % YTD / Leveraged Accounts -100% Cash +47.8% YTD

With the Consumer Price Index set to report on Thursday, expect some chop at the beginning of the week. The consensus is that inflation will come in around 7.3%.

Of course, since we can’t trust the government with any statistic these days, the headline number might understate the inflation rate until the market digests the details, just like last Friday’s bogus employment number. A legitimate drop in inflation (coming in below consensus) is unexpected and would boost buying. The market may significantly move in both directions until the picture is clear.

As pointed out in the Sunday night video, the context in cycles and sentiment allows for further rallying in the market. Mid-term election year seasonality also supports the rally after some chop:

The basic strategy is to work this next rally leg seemingly underway and see where it takes us. The Weekly Expected Move on the S&P 500 Futures gives us about a 200 point range from 4385 to 4586. We are using a break of Friday’s range (4438.50 to 4532.50) as our first directional clue, applying Balance Rules to the range.

As discussed in last night’s video, I am mindful of our elevated location along the 100-year market path and the downside inherent in this multi-timeframe channel top.

You should be aware of the risks too. Do not navigate this market without downside protection.

Here are the critical swing trade levels for this week:

Day Traders

I am anticipating another day of elevated volatility. Futures are flat to Friday’s close, near 4490. I will mark 59 points in each direction from the regular session open as my day range. Material resistance is at 4520, followed by 4554. Significant support lies at 4444 and 4390.

Today’s data points remain pretty similar to last week – but the contango in Vix futures may continue to act as a drag on market makers buying S&P futures. There is not a lot between 4500 and 4600 to drive prices in either direction. Past 4600, and positive gamma kicks in (supporting the market). Below 4500, traders are still likely to favor selling rallies rather than buying dips.

Overnight inventory is balanced and contained in Friday’s value area, and a triangle may be forming on the daily chart in what would potentially be an Elliott Wave “4” position. If so, the pattern would imply one more thrust higher. I am not an Elliott Wave fan, so I note the data point in my narrative.

The market is in a short-term balance for now. The extremes of the overnight range (4471.25-4507.75) may start to tip the scales one way or the other, with the caveat that doing so doesn’t get you out of the larger balance range discussed above (4438.50 to 4532.50). Today’s better play may be to wait for a move outside of the overnight range. Both the S&P 500 and NASDAQ 100 futures have poor highs from Friday, which means they will be easier to break than the lows.

Stay alert to all of your moving averages in the neighborhood. A lot depends on staying alive above the 5-day line and retaking the 21-day line. Support is at the 200-day line.

Be sure to review the Sunday night video at the top of the blog for context.

Good luck today and the rest of this week.

A.F. Thornton

[Corrected and Updated]

I wish I had coined the term for the week, but the honor goes to Mish Shedlock over at Mish Talk, a great blog if you have never encountered it. FAANG Roulette is the best description of the week. Of course, FAANG refers to Facebook (now Meta), Apple, Amazon, Netflix, and Google. Lately, we have expanded the acronym to FANGMAN+T. That allows us to add Microsoft, Nvidia, and Tesla. I cannot recall too many weeks with the kind of volatility we just experienced. It isn’t over yet, as the market is trading at new lows after the release of the monthly payroll report.

In this week that was Google took us to the moon, Facebook burned up on reentry, and Amazon … I am not sure what Amazon did yet except destroy a few Market Makers. The crowd shorted too much into yesterday’s close, and they appeared to be wrong as the S&P 500 recovered most of its 100 point loss right after the bell on what supposedly was a blowout earnings report. 

This morning, it would appear that the crowd missed something in the fine print – or they are just sour regardless. The S&P 500 Futures have given up the post-close gains and are trading at new lows at this writing, or at least they are running the stops under yesterday’s low.

It reminds me that bull markets always end on blowout earnings, a subtle point seemingly missed by the crowd. In any event, there must have been something in the small print, as the overnight futures are back down to testing yesterday’s low, having both breached the low and come back up inside range at this 4:00 am PST writing.

So our day will be framed by the overnight low and the Weekly Expected Move High at 4521. I need to write an entire article about the daily and weekly expected moves, as they affect the markets with uncanny accuracy. 

By Wednesday, any reasonable person would have doubted that the Weekly Expected Move high could draw the market back down by today. But it did with help from the volatility at hand. No matter, though. I am relatively sure that some Market Makers have been battered this week anyway, trying to keep their portfolio deltas neutral with so much activity after regular trading hours.

I will cover most of what you need to know in the new Sunday night video. I can already see that the expected move (and volatility) is poised to widen even more next week.

Also, our foray into the market for leveraged accounts stopped out yesterday. As low as we were, the market went still lower into the close. Cash accounts should still be maintaining existing positions. We don’t have a swing sell signal yet.

The January payroll numbers hit this morning, and new jobs exceeded expectations by a lot at 427,000. I guess you cannot stay home forever – especially when the government isn’t subsidizing you. The unemployment rate dropped to 3.9%. This is all interesting, as the White House prepared everyone for a bad report. Some reverse psychology, perhaps?

Anyway, we are in the new phase where good news is bad and vice versa. Good economic news, and even terrific economic news, likely means more inflation pressure and a less friendly Fed.

Day Traders

At this writing, futures have broken lower (as low as 4437), which shifts the daily expected move range to a high 1.92% at about 87 points. Mark the high and low by adding and subtracting 80 points from the regular session open. I see significant resistance at 4525 and 4556. Support is at 4450, then 4397.

Risk remains high as long as markets are below 4525, with the potential for a sharp upside move into 4600. Puts being covered and a sharp reduction in implied volatility potentially poses a violent rally. The above resistance levels are insignificant if markets can break the volatility trigger at 4525 and move higher. Of course, this would also require a breakthrough in the WEM high ay 4521, which is more possible than usual with the volatility.

On the other hand, the put strikes below to have a fair amount of gamma. These prominent put positions suggest that a violation of the levels will quickly induce volatility if markets decline below those levels.

Good luck today. I will update everything in the Sunday night video.

A.F. Thornton

The market (as represented by the S&P 500 index) is trading in a range between its 21 and 5-day lines. We only had a partial gap-fill (better than nothing), as seen in the 5-minute regular session chart above. The 21 is an intersection of the weekly and daily lines – a bit more formidable resistance. As expected, the WEM High is acting as a magnet as Market Makers defend the price.

If the market could take the WEM High out decisively, it would force Market Makers to buy futures to defend their positions. In furtherance of this possibility, the market is holding the overnight low, and the put/call ratio is high (bullish). Also, in similar downdrafts and gaps, the S&P 500 A/D line will usually pin at -400. It has managed to rise this morning.

My observation is that the market does not want to drop any further than the morning gap for now. But there is a math problem with the NASDAQ 100 pulling the S&P 500 down, while institutions are accumulating positions from less famous names that started their corrections in the middle of last year, names that in some cases are down more than 50%. Money managers might steer clear of the popular big-cap growth stocks until Amazon reports tonight, and the picture is clearer.

A.F. Thornton

We are taking a 5% position in SPY at the money calls, March monthly expiration at SPY 451.50 with at 2 point stop.

A.F. Thornton

I am concerned that the Weekly Expected Move high around 4521 will complicate trades for the next few days.

Market Makers got a gift from the Facebook motivated decline this morning. The market is back in the WEM range and below the forecast WEM high for the week. Market Makers may sell 4521 to keep prices below the level into Friday’s close.

Be careful.

Facebook’s report after the bell disappointed and is now about 35% off its peak. They lost subscribers for the first time. Maybe politics and censorship are finally coming home to roost, as has been the case at Twitter. The market will tell us whether this is a buying opportunity or not. A lot of the recent market gains are still associated with short-covering.

Today will be all about how much traction sellers get from this Facebook-driven gap down and what sectors will rise or drop in sympathy. I am not inclined to get too bearish yet, at least until the Navigator delivers a sell signal.

Day Traders

I am looking for about a 30 point range above or below the open, and my volatility forecast is still relatively low for the day. Support is about 4500 or so, and the most I see on the upside is about 4563.

I am concerned that the Weekly Expected Move low around 4521 will complicate trades this morning. Market Makers have a gift from Facebook to deal with their deltas at or below the WEM high. It could be a magnet now until tomorrow’s expiration at the close.

Both Gap and Spike Rules apply again this morning on overnight inventory that is net short. The gap is down, not up as yesterday. As with all gaps, the focus is on whether or not there is any countertrend fade. Watch NYSE tick closely as it can be an excellent first clue.

A failure of ticks to get positive is usually a sign that a fade will either not materialize or be weak and partial. A total gap-fill to yesterday’s low sets up a potential short point. Traders should monitor for continuation and see if it’s a true rejection or just a pause before finding acceptance within range.

Should we fill the gap and find acceptance within range, monitor for continuation and recognize the overhead resistance and difficulty in the climb higher.

We have more downside than upside signposts. The overnight low is now through Monday’s entire spike and has traded below its base. We were watching this spike yesterday when prices held well above it.  

Sellers in the NASDAQ 100 are certainly more prevalent, motivated by the dismal results from Facebook. NASDAQ futures are off double what the S&P’s are currently. Carry this forward in your narratives.

A.F. Thornton

As predicted, the market moved into the downtrend line after a gap fill following the open. The downtrend line is falling, so by the time we got there, it was slightly below 8600. All in all, it was a good session, with the S&P 500 closing above the key 21-day and 21-week lines.

But the momentum on the 15-minute chart was negatively diverging as the market wedged into the down trendline – and we had a sell signal on the day trading version of the Navigator algorithm. Mindful that we had come far from the recent low and into some formidable resistance, some profit-taking would have been in order tomorrow.

And then Meta (Facebook) reported right after the close. They missed their numbers. It is not a good time to disappoint when the crowd is in a bad mood. S&P Futures subsequently erased all of today’s gains, falling below the key 21 (mean) lines:

What happens after hours does not necessarily carry into tomorrow’s regular session. But if Alphabet (Google) sent us up today, Meta (Facebook) can undoubtedly point us in the other direction. A lot depends on their forward guidance in the conference call later today.

We were looking for the bears this morning, let’s see if they come out of hibernation.

Stay tuned.

A.F. Thornton